Drop in US GDP less than expected

Better-than-expected data for second quarter fuels hopes for end to recession.

31 Jul 2009 20:18 GMT

The data suggests the economy may be beginning to recover from a protracted recession [AFP]

"Today's GDP is an important sign that the economy is headed in the right direction and that business investment, which had been plummeting in the last several months, is showing signs of stabilising," Barack Obama, the US president, told reporters at the White House after the figures were released.

Unemployment rising

Many economists expect the US economy to begin expanding in the second half of 2009, but some have said that the scale of continuing job losses could hinder a quick recovery.

"GDP is still contracting ... that is still not creating new jobs; we are cutting back on production"

Tara Sinclair, an economics professor at George Washington University

The unemployment rate hit 9.5 per cent in June – its highest level in 26 years – and some economists say that the rate could top 10 per cent eventually.

Tara Sinclair, an economics professor at George Washington University, said that while the latest economic data is better than expected, US companies will still be on their guard.

"We are seeing two things. First of all, GDP is still contracting ... that is still not creating new jobs; we are cutting back on production," she said.

"Second, consumption fell by more than forecast for this quarter. So therefore we are also seeing that as consumers cut back, companies are not willing to hire workers because it is not a robust recovery."

While the GDP figures suggested that the rate of contraction in the economy was slowing, many areas of the economy were still very weak.

Private investment for the second quarter fell 20.4 per cent and consumer spending, the main driver of economic activity, dropped by 1.2 per cent.

'Weak' spending

Bart Van Ark, the chief economist at the Conference Board, said the GDP data "confirms that the path to recovery remains a long haul, with more disappointments likely in the months to come".

"Consumer spending came out worse than expected and is likely to remain weak into the third quarter because of ongoing clogging in income and credit channels," he said.

But the data showed that increased government spending, an upturn in vehicle manufacturing and a rise in trade had contributed to the better-than-expected overall GDP estimate.

The commerce department also made revisions to economic data on the first quarter, adjusting its estimate of a 5.5 per cent drop to 6.4 per cent.

In the fourth quarter of 2008, a 6.3 per cent decline was revised to 5.4 per cent.

Other adjustments to 2008 data showed that GDP growth for the full year was 0.4 percent, and not 1.1 per cent as previously estimated.